Reading 33- LOS f ～ Q1－5

1.Which of the following shows the key dividend dates in their proper sequence?

A)   Ex-dividend date, holder-of-record date, declaration date, payment date.

B)   Declaration date, ex-dividend date, holder-of-record date, payment date.

C)   Declaration date, holder-of-record date, ex-dividend date, payment date.

D)   Ex-dividend date, declaration date, holder-of-record date, payment date.

Click for Answer and Explanation B)

The board of directors announce the amount of the dividend, the holder-of-record date, and payment date. The ex-dividend date is two business days prior to the holder-of-record date, giving the firm time to identify the rightful owner of the dividends.

2.Shareholders selling shares between the ex-dividend date and date of record:

A)   forfeit the dividend, with the proceeds going to the buyer.

B)   forfeit the dividend, with the proceeds staying with the company.

C)   share the dividend with the buyer.

D)   receive the dividend.

Click for Answer and Explanation D)

The date of record is the date on which the shareholders of record are designated to receive the dividend. The ex-dividend date is the cut-off date for receiving the dividend. Shares sold after the ex-dividend date are sold without claim to the dividend, even if they are sold prior to the date of record. The dividend would be paid to the holder as of the close of trading on the day prior to the ex-dividend date.

3.Alumi Co. pays a dividend. Which of the following events is least likely to cause its stock price to fall? Alumi Co.:

A)   issues more common stock.

B)   pays its quarterly dividend.

C)   announces that its next quarterly dividend will decline.

D)   increases its debt to 75% of capital, the level of earnings per share maximization.

Click for Answer and Explanation B)

Stock prices tend to fall on the ex-dividend date, not on the pay date. Announcing a dividend cut is a negative signal to investors. While a stock repurchase is a positive signal to investors, a stock offering is a negative signal. While a higher debt level may maximize Alumi Co.’s earnings, that level is not likely to maximize the firm’s price since it is likely to be associated with a higher level of risk.

4.The cut-off date for receiving the dividend is known as the:

A)   holder of record date.

B)   ex-dividend date.

C)   date of payment.

D)   declaration date.

Click for Answer and Explanation B)

The cut-off date for receiving the dividend is known as the ex-dividend date. The declaration date is the date the board of directors approves payment. The holder of record date is the date on which the shareholders of record are designated. The date the checks are mailed out is known as the date of payment.

5.What is the earliest day on which an investor can currently purchase Amex, Inc., if the investor wants to avoid receiving a dividend and thereby avoid paying tax on the distribution, if the date of record is Thursday, October 31?

A)   Tuesday, October 29.

B)   Thursday, October 24.

C)   Monday, October 28.

D)   Thursday, October 31.

Click for Answer and Explanation A)

The ex-dividend date is now two business days prior to the date of record. Counting back two business days identifies Tuesday, October 29 as the date when the shares can be purchased without the dividend.